California State Tax Updates

For the latest news and updates on California state and local tax

May 13, 2022

United to House LA submitted documents to show they have collected 98,171 signatures for a ballot proposal to increase the real estate transfer tax on homes selling for more than $5 million. The proposal estimates it would generate $8 billion over 10 years and these funds would be dedicated to expanding and maintaining the availability of affordable housing in the LA area. The current real estate transfer tax rate on residential real estate is currently 0.45%. Pursuant to the ballot initiative, the real estate transfer tax would increase to 4% for real estate selling for more than $5 million and less than $10 million and the rate would increase to 5.5% tax on property selling for more than $10 million.

The California Franchise Tax Board and the New York Department of Taxation have issued a technical memorandum and a draft regulation respectively. The documents put out by the states revise their interpretation of P.L. 86-272. P.L. 86-272 prohibits states and localities from imposing income taxes on remote businesses if their only activity with the state is soliciting sales of tangible personal property. The Multistate Tax Commission recently reinterpreted P.L. 86-272, stating that businesses interacting with customers via a website or an app are engaging in unprotected business activities within the customer’s state in a variety of scenarios, and thus no longer qualify for P.L. 86-272 protection. Both California and New York are using this reinterpretation of P.L. 86-272 to modify their respective stances on when businesses can claim P.L. 86-272 protection. Furthermore, California has indicated that its revised interpretation of P.L. 86-272 can be applied retroactively. New York is also considering a retroactive application of its revised interpretation of P.L. 86-272. For more information, please see California’s Technical Memorandum, and New York’s Draft Regulation. If you have questions about whether your business may still be protected under P.L. 86-272, please contact a member of the Withum SALT Team.

March 25, 2022

Pursuant to P.L. 117-2, the Federal American Rescue Plan Act of 2021 broadens the EITC requirements for 2021 and future years to include married/registered domestic partner (RDP) not filing a joint return under certain circumstances. Specifically, the law provides the following:

“A Spouse/RDP can claim the CalEITC if married, not filing a joint return for the taxable year, had a qualifying child who lived with the spouse/RDP for more than half of the tax year, andeitherof the following apply:

If a person is married or registered domestic partners filing separately and have already filed their return but did not take the California Earned Income Tax Credit, they can file a superseded return prior to April 18, 2022, wait for a letter from FTB for instructions, or file an amended return.

Furthermore, a spouse/RDP that meets the above requirements may also qualify for the Young Child Tax Credit if the qualifying child was under the age of six at the close of the taxable year.

March 11, 2022

On February 14, 2022, California released Technical Advice Memorandum 2022-01, that provides guidance and examples of activities protected under P.L. 86-272. The TAM takes into account how the economy has changed since P.L. 86-272 was enacted due to technological advancements.

The Franchise Tax Board indicated businesses operations similar to the following fact patterns are not protected under P.L. 86-272:

Additional fact patterns can be found in the TAM 2022-01 here: https://www.ftb.ca.gov/tax-pros/law/technical-advice-memorandums/2022-01.pdf.

February 11, 2022

On February 9, 2022, California’s Governor Newsom signed Senate Bill 113 providing the much-anticipated legislative fix for businesses electing the Pass-Through Entity (“PTE”) tax. Previously, under A.B. 50, PTE credit passed through to qualified taxpayers could not reduce the net income tax below the tentative minimum tax (“TMT”). Retroactive for tax years beginning on or after January 1, 2021, S.B. 113 provides technical corrections allowing for the PTE credit to reduce net income tax below TMT. Additionally, the legislation:

Further, for tax years beginning on or after January 1, 2022, the bill ends the temporary suspension of net operating losses (“NOLs”) and eliminates the $5 million business credit limit previously enacted under California A.B. 85.

For taxable years beginning on or after January 1, 2019, S.B. 113, in modified conformity with the American Rescue Plan Act, excludes from gross income any amount received in the form of a federal restaurant revitalization grant and adopts, with exceptions, prohibiting any reduction in tax deductions, reductions in tax attributes, and denials of basis adjustments based on the exclusion from gross income.

For businesses considering making a PTE tax election, in many states PTE elections are yielding significant tax benefits. PTE election decision making requires modeling and analysis of the specific facts and circumstances to weigh the potential benefits along with the risks in determining the right course of action.

February 4, 2022

Per Assembly Bill 466, the California Franchise Tax Board (“FTB”) is now authorized to share unclaimed property information with the State Controller’s Office. Previously, the Franchise Tax Board was prohibited from sharing taxpayer information with the State Controller’s office.

Pursuant to AB 466, the FTB has added questions to the 2021 business tax returns. These questions include whether the business has previously filed an unclaimed property report with the Controller’s Office, the date the report was filed, and the amount of unclaimed property remitted.

Currently, the Controller’s Office may only use the information obtained from the FTB to educate taxpayers that are not in compliance with escheat laws. However, taxpayers should consider the aggressiveness of California Franchise Tax Board and should be aware of the increased risk of a possible audit.

November 10, 2021

California legislation AB-1402 extends the registration and filing requirements related to marketplace facilitators that goes beyond the Department’s existing laws requiring marketplace facilitators to register, collect, and remit sales and use taxes with the department. Effective January 1, 2022, marketplace facilitators are required to register, collect, and remit lead-acid battery recycling fees, lumber products assessment, electronic waste recycling fee, and tire fees with the California Department of Tax and Fee Administration. Excluded from this requirement are local prepaid mobile telephony surcharges.

Starting November 1, 2021, small business employers can apply for the 2021 Main Street Small Business Tax Credit to obtain financial relief due to COVID-19. Small businesses can utilize this credit to offset their income or sales and use taxes when they file their returns. The California Department of Tax and Fee Administration (“CDTFA”) will accept online applications through November 30, 2021.

Qualifications

A small business may qualify for the credit if it:

Small businesses may receive up to $1,000 per additional net qualifying employee, not to exceed $150,000. [See https://www.cdtfa.ca.gov/industry/main-street-small-business-tax-credit-II-AB150.htm]

November 4, 2021

The California Franchise Tax Board (“FTB”) issued a letter ruling setting out the FTB’s position on when a pass-through holding company is unitary with other pass-through entities in a number of different scenarios. Unlike the analysis for incorporated entities, the FTB’s unitary analysis for pass-through entities requires examining additional, non-traditional factors. Furthermore, when the holding company does not have any operations of its own, the weighting of the non-traditional factors in the analysis is enhanced. The second consideration is if the business structure creates unity. For example, if a holding company functions as a focal point or conduit for operating the business, then the affiliated entities will be considered unitary. In contrast, if the holding company was clearly formed for investment purposes, then there is no unity. Third scenario is if the holding company is associated with one operating business, then the holding company is not unitary with its parent or the operating company. Finally, unlike corporate holding companies, pass through holding companies may not need to own a controlling interest in the operating company in order to be consider unitary with the operating company. Even when a pass through holding company owns less than 50% of the operating entity, the FTB will still examine whether there are indications of a unitary relationship in making its determination.

September 23, 2021

The California Franchise Tax Board (FTB) issued guidance about the newly enacted elective pass-through entity tax (PTE) effective January 1, 2021, to January 1, 2026. [see A.B. 150(2021)] The FTB discusses how certain qualifying PTEs may annually elect to pay this entity-level state tax on income. In return, qualifying taxpayers receive credit for their share of the entity-level, ultimately reducing their California personal income tax.

Who Qualifies?

A “qualified taxpayer” can be individuals, fiduciaries, estates, or trusts subject to California personal income tax and must be a partner, member, or shareholder of a qualified electing entity. Note that a taxpayer must approve of having their pro-rate share of the qualified income of the electing qualified PTE.

PTE Election

A qualified taxpayer can make an annual election on a timely filed tax return. However, once the election is made, it is irrevocable for that year and is binding on all PTE partners, shareholders, and members.

For the 2021 tax year, the election must be made when the tax return is filed. Beginning January 1, 2022, and before January 1, 2025, the qualifying taxpayer must make the election when the tax return for the taxable year is filed and remit payment by June 15^th. Otherwise, the qualifying taxpayer cannot make the PTE election.

Due Dates

The elective tax must be paid by the due date of the original tax return. However, for the 2022 to 2025 tax years, the first payment of $1,000 or 50% of the elective tax paid in the prior taxable year, whichever is greater, is due by June 15^th of the taxable year of the election. The remaining amount must be paid by the due date of the original return without regard to extensions.

PTE Calculation

Each qualified shareholder’s distributive share of income subject to California personal income tax is subject to tax at 9.3%. Please note that some of California’s personal income tax brackets are lower and some are higher than the PTE rate. As such, some taxpayers may be over-paid and others under-paid as a result of making a PTE election. Please note that overpayments resulting from a PTE election are not refundable – taxpayers who are overpaid as a result of a PTE election may carryforward the unused credit for five (5) years.

September 16, 2021

Due to the California wildfires, the California Franchise Tax Board has extended the deadline to file California 2020 income tax returns, which would have been due between July 14, 2021 through November 15, 2021. The deadline extension to November 15, 2021 is granted to Taxpayers in declared disaster areas. The filings included in this extension are: Individual filers who previously claimed an October 15^th extension (strictly for the return filing and not the tax payment, as the tax payments were due on May 17, 2021), business entity filings due between the period of July 14, 2021 through November 15, 2021, and quarterly estimated tax payments due during the extension period.

June 28, 2021

The CDTFA recently issued guidance for small businesses concerning relief payment plans for sales tax due to Covid-19. Small businesses with annual taxable sales of less than $5 million can obtain a 12-month, interest-free payment plan for up to $50,000 of its sales tax liability. The loan must be paid in full by April 30, 2022, to be eligible for zero interest. The good news is that any business that took advantage of the prior 12-month, interest-free payment plan due July 31, 2021, is eligible to participate in this new 12-month interest-free payment plan. This taxpayer relief is only applicable to sales and uses tax returns due between December 15, 2020, and April 30, 2021. Taxpayers must apply for this payment plan no later than August 16, 2021, through their CDFTA online account.

Governor Newson recently signed Assembly Bill 150, which allows for an elective pass-through entity tax and amends and broadens the small business hiring credit (aka the Main Street Small Business Tax Credit). The law enacts the Small Business Relief Act, which permits a qualifying entity doing business in the state to annually elect to pay an elective tax based upon its qualified net income computed at the rate of 9.3%. The qualified entity must be doing business in California and is required to file either an S-Corp, Limited Liability Company, or Partnership tax return for taxable years beginning January 1, 2021, through January 1, 2026. A qualified entity is defined as an entity that is taxed as a partnership or S-corporation. The entity’s partners, shareholders, or members in the taxable year of election are exclusively corporations or taxpayers (not partnerships). The entity is not a publicly traded partnership or an entity permitted/required to be part of a combined reporting group. The election is irrevocable and is made on the original, timely filed return for that taxable year.

June 22, 2021

California Governor Gavin Newsom has signed a budget trailer bill that creates an elective pass-through entity tax. For taxable years beginning on or after January 1, 2021, and before January 1, 2026, qualified entity doing business in California can make an annual, irrevocable election to pay a pass-through entity tax similar to the New York PTET. The tax is computed at the rate of 9.3% for the taxable year for which the election is made.

Entities eligible to make the California PTET election include entities taxed as partnerships (except publicly traded partnerships) and S Corporations. This elective tax is in addition to, and not in place of, any other tax required to be paid under California’s personal income tax or corporation tax laws.As such, owners of pass-through entities making the election claim a credit for their share of the pass-through entity’s PTE tax on their respective returns. If this results in an overpayment, excess credit may be carried forward for five (5) years.

For taxable years beginning on or after January 1, 2021, and before January 1, 2022, the elective tax is due and payable on or before the due date of the original return that the entity is required to file, without regard to any extension of time for filing the return, for the taxable year of the extension. For future tax years, the Department will establish new due dates for making the election and payment of the tax.

The concept of pass-through entity tax is still fairly new feel free to read Withum’s discussion of the rapid changing landscape of PTET’s.

June 18, 2021

The California Franchise Tax Board (FTB) has issued a 45-day notice of amendments to the draft language of the proposed regulation at California Code of Regulations, Title 18, Section 18662-7,Domestic Pass-Through Entity Withholding(Proposed Regulation), and proposed amendments to the final regulations at Sections 18662-0 through 18662-6 and 18662-8 (Final Regulations)(together, the “Proposed Regulations”). The Proposed Regulations include, among other things, measures to: add language relating to domestic pass-through entity withholding; amend provisions on foreign partner withholding to more closely reflect the federal language; and specify withholding requirements for trusts and estates. The purpose of the notice is to elicit comments on the newly revised Proposed Regulations. Written comments regarding the Proposed Regulations will be accepted until 5:00 p.m. on July 23, 2021. All inquiries and comments regarding the notice should be directed to Leah Thyberg of the FTB whose contact information is set forth in the notice.

The California Franchise Tax Board (FTB) has updated its Golden State Stimulus webpage. Among other things, the updated webpage refers to the governor’s proposal to add and expand stimulus payments for more Californians and notes that these additional payments are not yet available and are pending legislative action; and expands the discussion of when recipients will receive their payments. Revisions have also been made to the following taxpayer assistance sections: “How to get your payment”; “What to do” for a taxpayer who filed a 2020 return but did not claim a California earned income tax credit for which the taxpayer is eligible; and “Need some help?” For more information, please visit the FTB website on this topic.

June 9, 2021

The California Franchise Tax Board (FTB) has replaced the webpage it recently created for Assembly Bill 80 and the tax treatment of forgiven loans with a new webpage. After providing an overview of the bill, the webpage covers three topics: (1) income, (2) expenses, and (3) “What to Do” (i.e., steps taxpayers need to take to amend returns to claim expenses made deductible under A80 that were not previously deducted).

May 26, 2021

The California Franchise Tax Board (“FTB”) has created a webpage to provide guidance on the State tax treatment of forgiven loans. More specifically, the website will address three topics: (1) the exclusion from gross income for loans that are forgiven under California’s conformity to federal provisions such as the Paycheck Protection Program (“PPP”) and Economic Injury Disaster Loan (“EIDL”) advance grant amounts; (2) expenses paid for with for PPP loans and EIDL advance grants that were forgiven; and (3) California’s conformity, with modifications, to four federal acts—the CARES (Coronavirus Aid, Relief, and Economic Security) Act, the Paycheck Protection Program and Health Care Enhancement Act, the Paycheck Program Flexibility Act of 2020, and the Consolidated Appropriations Act, 2021—and the date of California’s conformity to each of them.

The California Franchise Tax Board (FTB) will hold a sixth interested parties meeting (“IPM”) to solicit public input regarding additional proposed amendments to California’s market-based rules regulation (Cal. Code Regs. Title 18 § 25136-2). The sixth IPM will be held telephonically on Friday, June 4, 2021, at 10:00 a.m. To attend, interested parties need to RSVP to the FTB by May 28, 2021, at the email address set forth in the notice. Instructions on how to participate in the sixth IPM are set forth in the notice as well. The proposed amendments to be discussed include: added definitions of asset management services and of professional services; examples to be included in the regulation; addition of a special rule for certain professional services; and a change to the applicability date (to taxable years beginning on or after January 1, 2023).

May 13, 2021

Taxpayers were residents (and domiciliaries) of California before 2008. On July 18, 2008, Taxpayers sold their shares in a corporation and did not pay California tax on the gain from that sale because they considered themselves nonresidents as of February 26, 2008 (the date on which they rented an apartment in Henderson, Nevada). The California Office of Tax Appeals (OTA)—affirming the Franchise Tax Board’s (FTB’s) proposed assessment of additional taxes against the Taxpayers—determined that even though Taxpayers took some steps to evidence California was not their domicile in renting the Nevada apartment, they did not adopt a new permanent home in doing so (the apartment was part of their plan to find a new permanent home, but was not the actual move to a new residence with the intent to remain there permanently). Further, because the taxpayers were California domiciliaries and physically in the State for a majority of the time leading up to and on July 18, 2008, their 28-day presence in Nevada (date they had moved out of California to the date of the stock sale) did not outweigh the prior California residency/domicile contacts so as to greater a greater connection to another state. Therefore, the Taxpayers were California residents on the date of the stock sale, and owed personal income tax on the gain on the transaction.

May 5, 2021

The California State Controller and Franchise Tax Board (FTB) announced an extension to May 17, 2021, for individual California taxpayers to claim a refund for tax year 2016. Taxpayers normally have four years to file a claim for a state tax refund in California. Tax year 2016 state income tax returns were due in 2017, so the standard four-year statute of limitations for claiming a refund would have expired on April 15 of this year. With the postponement, individual taxpayers who are due a refund may now file their return for the 2016 tax year no later than May 17, 2021, to claim their money. Similarly, theInternal Revenue Service(IRS) recently announced an extension to May 17 for individual taxpayers who are due a refund on their tax year 2017 federal income tax returns. The IRS normally has a three-year statute of limitations to file a claim for a federal tax refund. Taxpayers claiming a state refund for previous tax years can find Form 540 on FTB’sforms locatorfor the applicable tax year.

In November 2016, California voters approved Proposition 56, which included electronic cigarettes in the definition of other tobacco products (“OTPs”). Effective April 6, 2021, California has amended State regulation on wholesale cost of tobacco products (Title 18, Section 4076): which now: defines the terms “electronic cigarettes,” “sold in combination with,” and “tobacco products”; clarifies the scope of manufacturing costs in determining the wholesale cost of tobacco for a manufacturer or an importer that is also a distributor; and provide examples of items that are and are not considered tobacco products. Further, California has also adopted a Regulation on tobacco product manufacturers (Title 18, Section 4077), which among other things: defines the term “tobacco product manufacturer”; provides that a retailer who mixes, blends, or combines a tobacco product that is not in a form suitable for human consumption, such as liquid nicotine, and other ingredients and components to make a product that is suitable for human consumption is a tobacco product manufacturer; and provides that a retailer who is not a licensed manufacturer, importer, or distributor must purchase its tobacco products from a licensed tobacco products distributor or wholesaler. If you sell OTPs in California and have questions about local taxation issues, please reach out to Withum’s State and Local Tax Group.

March 23, 2021

The California Franchise Tax Board (FTB) has announced that California will extend the state tax filing and payment deadline for 2020 returns for individuals to May 17, 2021. This extension does not apply to estimated tax payments due on April 15, 2021. This relief is available to all individual California taxpayers (including those who file composite returns) without the need for them to file a request with or contact the FTB. The FTB also has created a FAQs regarding the extension, 2020 tax year extension to file and pay (individual) . The California extension is similar to the federal tax filing and payment deadline extension the Internal Revenue Service (IRS) and the Treasury Department announced on March 17, 2021. In IR:2021-59 , they announced that the federal income tax filing and payment due date for individuals for the 2020 tax year will be automatically extended from April 15, 2021, to May 17, 2021, and that this relief does not apply to estimated tax payments that are due on April 15, 2021, which remain due on April 15, 2021. ( News, Filing and Payment Extension for Individuals, California Franchise Tax Board Homepage, 03/17/2021 ; California FTB News Release No. 03/19/2021, 03/19/2021.)

March 17, 2021

The California Franchise Tax Board (“FTB”) voted to proceed with adopting certain proposed amendments to California Code of Regulations, Title 18, section 25137 (Regulation); which permits a taxpayer to petition for the use of an alternative apportionment method, if the standard allocation and apportionment provisions do not fairly reflect the extent of a taxpayer’s business activity in California. There was limited formal guidance as to how such petitions were to be considered by the FTB, so the proposed amendments are aimed at addressing that issue.

May 2, 2020

The California Franchise Tax Board (FTB) provided some preliminary information regarding California’s conformity and nonconformity to the CARES Act. California generally conforms to the pension-related items of the Act, such as early withdrawal penalty and minimum distribution rule changes. However, California does not automatically adapt to the modifications made concerning loans from a qualified retirement account. California does not conform to other changes made by the CARES Act, including those related to loan forgiveness compared to the paycheck protection program. Furthermore, California does not conform to the provisions regarding net operating loss carrybacks, charitable contributions, student loan forgiveness, business interest limitations, and the prior year alternative minimum tax liability for corporations. The FTB will issue further guidance as it completes its analysis of the CARES Act.

Source: https://www.ftb.ca.gov/about-ftb/newsroom/tax-news/may-2020/californias-conformity-with-the-federal-cares-act.html

March 20, 2020

Specific info on type of filing and deadlines can be found on the State of California Franchise Tax Board site here.

This relief includes changes to the various tax filing and payment deadlines that occur on March 15, 2020, through June 15, 2020, to July 15, 2020. “This includes:

Taxpayers claiming COVID-19 relief should write the name of the state of emergency (for example, COVID-19) in black ink at the top of their tax return to notify FTB of the extension period provided by the relief. If taxpayers are e-filing, they should follow the software instructions to enter disaster information.

In addition, the FTB will also waive interest and any late filing or late payment penalties that would normally apply.

More on Taxes and the Coronavirus Pandemic.

Disclaimer: Please note this is the information that is readily available at this time, it is subject to change so please consult your Withum tax advisor.

November 2019

The economic nexus thresholds for determining if a taxpayer is doing business in California for the 2019 taxable year were released by the California Franchise Tax Board. A taxpayer is considered to be doing business in California if it is organized or commercially domiciled in California; its sales in California exceed a threshold amount or 25% of its total sales; its real property and tangible personal property in California exceed a threshold amount or 25% of its total real property and tangible personal property; or the amount paid in California by the taxpayer for compensation exceeds a threshold amount or 25% of the total compensation paid by the taxpayer. The threshold values for the 2019 tax year are as follows: sales, $601,967; property, $60,197; and compensation, $60,197. (Memorandum on Indexing, Personal Income Tax Law, 2019 Tax Year, California Franchise Tax Board, 08/27/2019.)

Aprl 2, 2020

The City of L.A. is offering emergency micro-loans between $5,000 and $50,000 to small businesses affected by the coronavirus. For micro-loan terms and eligibility, please click here: https://ewddlacity.com/index.php/microloan-program.

Source: https://laist.com/2020/03/23/where_to_get_financial_assistance_food_and_more_during_the_coronavirus.php

Aprl 2, 2020

Due to the disruptions caused by COVID-19 to the small business community, the COVID-19 Small Business Resiliency Fund was created. It allows impacted small business owners to access up to $10,000 for employee salaries and rent. This program is administered in partnership with Northeast Community Federal Credit Union.

To be eligible for the COVID-19 Small Businesses Resiliency Fund, small businesses must:

Applications must be completed and submitted via email to [email protected] or they can be mailed or delivered to:
Attn: Judy Lee – COVID 19 Small Business Resiliency Fund
1 Dr. Carlton B. Goodlett PL. Rm# 448
San Francisco, CA 94102

Please review the application for all needed documents to be submitted. In addition, the following will be required:

Source: https://oewd.org/covid-19-small-business-resiliency-fund